padcrasher
Posts: 1815
Joined: Tue Aug 10, 2004 6:17 am

The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 2:50 am

The First Call consensus has Southwest earning 4 cents a share or 31 Million this Quarter. This "includes" an expected gain of 180 Million due to fuel hedging. Not counting this, that's a 9% loss margin if you go with First Call's revenue estimates.

Continental a "legacy" "major" "cartel" airline with no fuel hedges and much higher debt payments, is expected to have a 7.8% loss margin. Outperforming Southwest in this respect.

If fuel were to come down, Southwest's stock price would fall like a house of cards. It hasn't sunk in that this company is making it only on fuel hedging.
 
Capt.Fantastic
Posts: 811
Joined: Thu Aug 12, 1999 4:01 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 2:59 am

What is fuel hedging? High gas prices are keeping SW's stock from plumeting? Interesting.

SW flying around in the Emperor's New Clothes.
 
starrion
Posts: 969
Joined: Sat Jul 19, 2003 1:19 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:03 am

Perhaps it hasn't sunk in yet that THEY'RE MAKING MONEY!

Several airlines are now into double digit quarters since they last saw a profit. Companies are supposed to operate in order to make a profit. UA and US are both in Ch. 11. Delta is on life support. CO and NW are both hanging on by their fingernails.

In SW case it doesn't matter where the profit comes from. Smart business decisions have led them to another profitable quarter. Others could learn from their example instead of throwing stones.
Knowledge Replaces Fear
 
BlatantEcho
Posts: 1815
Joined: Wed Sep 27, 2000 10:11 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:04 am

Not to be mean, but the first post makes zero sense, and the second one makes less.

Both references to the "Emperor's New Clothes" (sic) are at least gross simplification of something you both don't understand, or better yet, generalities about a childrens story you don't know very well either.





[edit: clarity]

[Edited 2005-04-08 20:05:18]
They're not handing trophies out today
 
padcrasher
Posts: 1815
Joined: Tue Aug 10, 2004 6:17 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:06 am

WN's skyhigh P/E ratio exists because of this false assumption that their core business model is producing these low CASMs for which they can run rough shod over other airlines. Well guess what? It's not the core business model after all but the geeks over in fuel purchasing who have done one hell of a job along with huge amount of pure luck.

If fuel were to drop and airlines started producing margins over and above Southwest, that would be the first time in decades that this has happened.
The P/E ratio would seem way out of line. The price would drop.

[Edited 2005-04-08 20:09:16]
 
FI642
Posts: 992
Joined: Sat Mar 12, 2005 9:48 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:07 am

If others had hedges in place, they wouldn't be in the poor house now.

Air Transport World (April 2005) has a great article about WN in it. WN is NOT stupid. Do what you must to show a profit... I bet DL wishes they hadn't sold their hedges . . .
737MAX, Cool Planes for the Worlds Coolest Airline.
 
ilikeyyc
Posts: 1326
Joined: Tue Dec 09, 2003 8:09 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:09 am

Can you provide a link to this "consensus"?

Fuel hedging is basically a way to offset costs. An airline buys fuel when it is at a cheap price, only to sell it at a specified later date.
Fighting Absurdity with Absurdity!
 
DeltaMIA
Posts: 1622
Joined: Wed Feb 04, 2004 11:53 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:10 am

Quoting BlatantEcho (Reply 3):
Not to be mean, but the first post makes zero sense

Yes it does. She is saying if WN doesn't hedge fuel they would be losing money, ie paying present prices.
Not certain of how many days, months, years they have hedged, but at some point they will have to start paying today's prices on fuel. Maybe by then their revenue will increase.
It's a big building with patients, but that's not important right now.
 
padcrasher
Posts: 1815
Joined: Tue Aug 10, 2004 6:17 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:11 am

yahoo

And fuel hedging is not to lower costs but to smooth out price spikes. Otherwise all airlines would do it, because after all it lowers their costs all the time right?
 
padcrasher
Posts: 1815
Joined: Tue Aug 10, 2004 6:17 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:15 am

"In SW case it doesn't matter where the profit comes from."

Oh it matters very much were WN's profits come from. From the core business? Or gains in commodity trading? Airlines do not trade oil futures as a profit making exercise. Only to smooth out fuel costs over time.
 
tockeyhockey
Posts: 880
Joined: Fri Feb 04, 2005 10:57 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:17 am

Quoting Capt.Fantastic (Reply 1):
What is fuel hedging?

fuel hedging is when a company buys jet fuel at a price at which they think it will rise or fall to in the future. WN bought a ton of fuel from commodoties brokers a few years ago, at a very reasonable rate. the brokers bet that gas wouldn't go much higher than $40 per barrel. the brokers were wrong, but they still have to sell the gas to WN at that rate.
 
PHLBOS
Posts: 6504
Joined: Thu Apr 01, 2004 6:38 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:17 am

Quoting Padcrasher (Reply 8):
And fuel hedging is not to lower costs but to smooth out price spikes. Otherwise all airlines would do it, because after all it lowers their costs all the time right?

Not if the price of fuel should drop... like it did in the mid '80s and immediately following 9/11/01.

Had the fuel prices dropped instead of risen this past year, WN's hedged rate would've been higher than the market rate.
"TransEastern! You'll feel like you've never left the ground because we treat you like dirt!" SNL Parady ad circa 1981
 
PVD757
Posts: 3021
Joined: Sun Aug 24, 2003 8:23 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:20 am

Isn't fuel price part of operating costs? If fuel was at $30 a barrel, then WN wouldn't need to hedge, therefore they would report the same frickin' financials. What seems to be said is here is that "WN is only making a profit because they were smart enough to hedge!" To which I would say "yup, good call on that one WN," not so much as "geesh, what they hell are they doing, they're idiots." Another analogy would be like Yankee fans saying "thank goodness we won all those chamionships, but boy were we stupid to buy Babe Ruth from the Red Sox and for drafting Micky Mantle."
 
tockeyhockey
Posts: 880
Joined: Fri Feb 04, 2005 10:57 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:21 am

Quoting Padcrasher (Thread starter):
If fuel were to come down, Southwest's stock price would fall like a house of cards. It hasn't sunk in that this company is making it only on fuel hedging.

you forget the fact that WN has paid millions to retrofit their 73s with wingtips. they are one of the few airlines that had the cash on hand to do that. (CO is the only other one i can think of.)

this is going to save them a ton of money as fuel costs continue to rise, putting them in a great position compared to airlines flying without wingtips in four or five years.
 
padcrasher
Posts: 1815
Joined: Tue Aug 10, 2004 6:17 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:22 am

Quoting PHLBOS (Reply 11):
Not if the price of fuel should drop... like it did in the mid '80s and immediately following 9/11/01.

Had the fuel prices dropped instead of risen this past year, WN's hedged rate would've been higher than the market rate.

Exactly! We have this false impression going around these boards that "hedging" always makes you money. You can never lose.
 
tockeyhockey
Posts: 880
Joined: Fri Feb 04, 2005 10:57 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:23 am

Quoting PVD757 (Reply 12):
If fuel was at $30 a barrel, then WN wouldn't need to hedge, therefore they would report the same frickin' financials.

no, if fuel went to $30, WN would still be buying at $40 (or whatever they agreed to) and would be losers in the bet. that's all hedging is anyway -- educated betting. you're betting whether the cost of fuel will be higher or lower in a year or two years time.
 
PVD757
Posts: 3021
Joined: Sun Aug 24, 2003 8:23 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:27 am

I've been informed incorrectly then, I was told that hedging is a cap on a price versus being a definate agreed upon price - apologies!
 
tockeyhockey
Posts: 880
Joined: Fri Feb 04, 2005 10:57 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:28 am

Quoting Ilikeyyc (Reply 6):
Fuel hedging is basically a way to offset costs. An airline buys fuel when it is at a cheap price, only to sell it at a specified later date.

sorry to be the fuel hedging nazi, but this is not correct. you agree to buy at a later date. it's called buying "futures" -- you agree with a commodoties broker that fuel will be $40 a gallon in two years. the broker hopes that the real cost of fuel in two years is lower than $40, the buyer hopes that it is higher. if it is $50, the airline wins because they are buying fuel for lower than market price two years from now. if it is $30, the airline loses because they are paying $10 more per barrel than market prices.

it's legalized gambling -- sometimes you win, sometimes you lose.
 
Capt.Fantastic
Posts: 811
Joined: Thu Aug 12, 1999 4:01 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:29 am

And the post by BlatantEcho is essentially pointless as it adds no information or commentary to the initial post, just an empty critique of metaphors.

Incidently, if the first post makes "zero sense", than the second (theoretically) cannot make "less" than zero if we are assuming a scale of absolute zero.

If you disagree with what Padfcrasher says, than make am argument against it instead of playing English teacher.

My goodness.
 
tockeyhockey
Posts: 880
Joined: Fri Feb 04, 2005 10:57 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:46 am

Quoting Capt.Fantastic (Reply 18):
Incidently, if the first post makes "zero sense", than the second (theoretically) cannot make "less" than zero if we are assuming a scale of absolute zero.

i would argue that a post can make negative sense.

if a post is so poorly written and so off topic, it can actually detract from the overall value of the thread, thus making a negative impact on the quality of the conversation.

anyway.

i think that WN is the smartest airline in the business, regardless of a fall in stock price right now. they are the fastest growing airline, they are making the biggest impact at airports of any other airline, and they are continually upgrading their equipment and networks. anything else need to be said on their behalf?
 
ckfred
Posts: 4694
Joined: Wed Apr 25, 2001 12:50 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 3:57 am

I think the point that most everyone can agree is that if oil does stay above $50 a barrel, and many experts think it will, WN will have to eventually pay prices for jet fuel similar to what the legacies are paying.

The question then becomes whether WN will start increasing fares the way that the legacy carriers have done, seek to hold the line on wage increases or even wage cuts, or both.

Of course, if the price of oil collapses the way internet and technology stocks collapsed in 2000 and 2001, then the issue becomes moot.

AA has explored the possibility of installing winglets on the 737 fleet. With oil above $50 a barrel, cost isn't an issue. The fact that winglets add 5 feet to the wingspan is the issue, because it limits the gates where the aicraft can park. But since the 737s won't be flying to ORD much longer, that shouldn't be an issue.
 
padcrasher
Posts: 1815
Joined: Tue Aug 10, 2004 6:17 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:00 am

tocky

I take you dont get the part about fuel coming down as having a lowering effect on the stock price. Let me spell it out for you as I assumed you knew too much.

Southwest's stock price is not high because they "make money". Door knob factory's have higher margins than Southwest. WN's stock is high because the market believes it can take market share from other airlines. It's a category killer. It has nothing to do with them making a crappy thirty Million.
If fuel were to go down, "eliminating WN's fuel cost advantage" the true perfomance of the business models would come out showing other airlines making more money than WN. That would be devestating to the stock price.
 
tockeyhockey
Posts: 880
Joined: Fri Feb 04, 2005 10:57 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:11 am

Quoting Padcrasher (Reply 21):
I take you dont get the part about fuel coming down as having a lowering effect on the stock price. Let me spell it out for you as I assumed you knew too much.

i'm not sure what this means. you assumed i knew too much?

here's my point: how the heck can you argue that lower fuel costs would hurt an airline??? it only hurts WN if they lose on their fuel hedging bet (which they didn't)

in the future, who knows what the cost of oil will be. but my guess is that WN will stay on the right side of the bet.

as for your talk about WN's margins and their stock price, i wouldn't argue with you. they have an inflated stock price because investors believe that they will emerge as a dominant carrier in 5-10-25 years. i agree with that analysis.

your hypothetical situation in which WN missed on their hedge is just that -- hypothetical, and therefore pointless. if ifs and buts were candy and nuts...

they made the right bet, they are doing very well, they are growing and pressuring other airlines. what else do you need to know about them?
 
padcrasher
Posts: 1815
Joined: Tue Aug 10, 2004 6:17 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:16 am

Quoting Tockeyhockey (Reply 22):
how the heck can you argue that lower fuel costs would hurt an airline???

Tocky you not getting it. I did not say hurt "Southwest". Only the "stock price" Two entirely different things.
 
ntspelich
Posts: 740
Joined: Tue Aug 05, 2003 2:35 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:16 am

And, I hate to break it to you, but we're 100% hedged for the third and fourth quarters of this year, something like 75% hedged next year and already 60-some% hedged for 2007.

Call it what you want, but I call it sound financial planning and excellent foresight by our leadership, both corporate and financial.

NTS
United 717 heavy, you're facing the wrong way. Any chance you can powerback to get off of my deice pad?
 
starrion
Posts: 969
Joined: Sat Jul 19, 2003 1:19 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:25 am

Quoting Padcrasher (Reply 21):
If fuel were to go down, "eliminating WN's fuel cost advantage" the true perfomance of the business models would come out

And if your Aunt had balls she'd be your uncle.


Fuel prices ARE astronomical. Most of the airlines ARE suffering dreadfully. This is likely to continue according to the economists. SW is making money because they took the the chance. Good choice Southwest.

I can understand you don't like them. But deal already.

For the record I fly Delta, and am praying for their survival.
Knowledge Replaces Fear
 
padcrasher
Posts: 1815
Joined: Tue Aug 10, 2004 6:17 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:29 am

Quoting Starrion (Reply 25):
can understand you don't like them

I made reference to their high P/E ratio. Where do you get I don't like them?
 
jacobin777
Posts: 12262
Joined: Sat Sep 11, 2004 6:29 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:29 am

Tockeyhockey is correct...

Fuel hedging is part of the whole airline strategy, one of many parts...so to say they got "lucky" is a bit off......its part of doing business...just like maintenance, pension funding, etc.
"Up the Irons!"
 
starrion
Posts: 969
Joined: Sat Jul 19, 2003 1:19 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:36 am

I've seen several posts from you regards SW and the tone has been pretty negative. The title of this thread has a derisive tone to it as well.

And I understand your point that if just airline operations were concerned SW would be losing money. But Wall St doesn't care. The bottom numbers, hedging included is what matters, and always will. I invest in a company that has a great future to it, but they had a bad quarter and "only" made 85% of what Wall st was expecting. They're down 33% this week. Wall st only cares about the numbers- and they love LUV.

[Edited 2005-04-08 21:40:02]
Knowledge Replaces Fear
 
tockeyhockey
Posts: 880
Joined: Fri Feb 04, 2005 10:57 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:38 am

i don't like to fly WN either, but i am impressed by their business model, and, more importantly, their business choices. lPHL, BWI, SAN, 73G, wingtips, point to point, fuel hedging.

can you name something that they've done wrong, or where an obvious mistake has been made in their business model?

the fact that they hedged is a positive, not a negative. it is not covering up holes in their buisness model, it is PART of their business model.
 
Planesmart
Posts: 1716
Joined: Sun Dec 05, 2004 3:18 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:39 am

Fuel hedging is used by businesses to create future certainty. For an airline, they can sell tickets 6 months forward, knowing what price they will pay for fuel. They can do the same for interest rates. They can control other costs like salaries, etc so using hedges creates as close to 100% certainty about future costs as is possible.

Hedging does NOT reduce costs. During periods of rising/rapidly rising prices, it may reduce costs. The reverse applies when prices are falling.

Most airlines that write fuel hedges / forward contracts, do so consistently. In other words, they do not speculate.

Most airlines that write fuel hedges do not take 100% cover - they cover between 30 & 80% of projected consumption, depending on company policy.

WN still pay their fuel supplier the market price. As a hedge matures, the broker, bank, etc they have written it with pays them the difference between the market price of the day and the hedge price.

Airlines that behave like speculators, buying fuel and interest hedges when they think the market is going to behave in a particular way, are of serious concern to financiers and bankers. If speculating was so easy, every hedge dealer would have done it and retired.

Padcrasher you make good points. However, with all around them making losses, and WN being the market Cindarella, i expect they have taken the opportunity to charge as much as possible as costs while they can, like spares write-offs, charging refurbishments as repairs/maintenance, etc.

I don't believe their financial position is quite as bleak as the raw numbers suggest, assuming revenue figures are correct.
 
Pope
Posts: 3995
Joined: Thu Mar 24, 2005 5:57 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:40 am

"If fuel were $30 a barrel"

Yeah right. The days of $30/barrel fuel are gone. There are many days of $60/barrel fuel ahead of us than $30/barrel fuel days.

Hedging is a risk-mgt (not a risk elimination) strategy. Like any risk mgt strategy it is not done in a vacum. By not having to undertake immediate cost reduction steps because of a bump in fuel prices SW can weather whatever operating problems it experiences easier. You don't see them rushing to fire FA's or furlough pilots.
Hypocrisy. It's the new black for liberals.
 
gokmengs
Posts: 894
Joined: Wed Mar 09, 2005 2:48 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:40 am

Quoting Tockeyhockey (Reply 13):
you forget the fact that WN has paid millions to retrofit their 73s with wingtips. they are one of the few airlines that had the cash on hand to do that. (CO is the only other one i can think of.)

this is going to save them a ton of money as fuel costs continue to rise, putting them in a great position compared to airlines flying without wingtips in four or five years.

I know they save money but I doubt if they would make or break an airline or would save a "ton" like you said.

Quoting Tockeyhockey (Reply 19):
think that WN is the smartest airline in the business, regardless of a fall in stock price right now. they are the fastest growing airline

Correct me if I'm wrong but I thought B6 is the fastest growing airline in U.S.

Not to take away anything from WN and what they did over the years, but padcrasher has a good point. Southwest has been making much of its profit due to hedging, and the stock market is pricing them as if they have a superior business model regardless of fuel prices, but I don't think with lower fuel prices WN would be able to gain substantial market share over the majors
Gercekleri Tarih Yazar Tarihide Galatasaray
 
padcrasher
Posts: 1815
Joined: Tue Aug 10, 2004 6:17 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:40 am

My tone...LOL OK starrion. I'll try and keep my post regarding the business model more upbeat...By the way, you can go jump in lake.
 
ContnlEliteCMH
Posts: 1375
Joined: Wed Mar 02, 2005 8:19 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 4:51 am

Quoting Padcrasher (Reply 21):
Southwest's stock price is not high because they "make money". Door knob factory's have higher margins than Southwest. WN's stock is high because the market believes it can take market share from other airlines. It's a category killer. It has nothing to do with them making a crappy thirty Million.
If fuel were to go down, "eliminating WN's fuel cost advantage" the true perfomance of the business models would come out showing other airlines making more money than WN. That would be devestating to the stock price.

Wow, a woman who talks money. That is super sexy. Do you like football too? And are you married?  Big grin
Christianity. Islam. Hinduism. Anthropogenic Global Warming. All are matters of faith!
 
texan
Posts: 4059
Joined: Tue Dec 23, 2003 2:23 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 5:19 am

WN has hedged 100% of their fuel for this year. They have hedged a good amount for next year. As oil prices are believed to keep rising until July, at which point they will fall back a slight amount before rising again, this is a very good strategy. But, just in case oil prices did drop dramatically, WN has an "out" clause in their hedging contract which would call for a minimal loss for WN before their fuel prices were back to a very low price.

Texan
"I have always imagined that Paradise will be a kind of library."
 
User avatar
mariner
Posts: 18098
Joined: Fri Nov 23, 2001 7:29 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 5:39 am

But Southwest's stock price is not all that high, and has not been for some time.

Presently, it (LUV) is trading below $15, while JetBlue (JBLU) is almost $20, and a lot of people believe it is JBLU that is seriously over-priced, not LUV.

A couple of years ago, before the oil price shock began, several legacy carriers were trading at higher prices than LUV.

This reflected the then analyst and market view that LUV was "stagnating".

But that has changed. The new CEO at LUV has taken a very aggressive position on growth - see PHL, MDW, PIT and the effective control of ATA.

How will it shake out? I've no idea. But LUV has remained profitable throughout the downturn and that counts for something.

As to the hedges - fuel is a cost to airlines. If an airline successfully manages its fuel costs, then management is doing its job, regardless of how that was achieved. Good management, good!

Hedging costs money up front. The reason most of the legacy/majors were not hedged is that they didn't think it was necessary. Bad management, bad!

When they realized it was necessary, (a) they couldn't afford it and (b) they may have been in bankruptcy.

United, for example, had to get the permission of the bk judge to spend the money to put a few hedges in place at around $40.

cheers

mariner
aeternum nauta
 
Tango-Bravo
Posts: 2887
Joined: Sun Jun 17, 2001 1:04 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 5:50 am

Quoting Starrion (Reply 25):
Fuel prices ARE astronomical. Most of the airlines ARE suffering dreadfully. This is likely to continue according to the economists

Fuel prices are almost sure to remain at or near (or even higher than) current levels unless there is a major collapse of a significant sector of the world economy -- such as the collapse of the Asian economies in the mid-late 1990s -- which would reduce demand significantly. Which would also reduce air travel demand significantly.

It looks like a "Catch 22" for the airlines. And it's long past time for the legacies to snap out of their wishful thinking that everything will be fine when (which may be never) fuel prices drop significantly.

Herb Kelleher saw the end of unrealistically low fuel prices (caused by reduced demand brought on by the Asian economy collapse) back in 1998-99 and prepared Southwest well for what was to come. At the same time, the legacies stuck their heads in the proverbial sand and fattened up, foolishly assuming (based on their actions) that the temporary anomolies that made them temporarily profitable in spite of themselves would continue forever.
 
justapassenger
Posts: 75
Joined: Wed Dec 15, 2004 9:36 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 6:02 am

I think that the most interesting thing about all of this is that WN could make a lot more money this year by shutting down the airline and selling its hedges.
 
Planesmart
Posts: 1716
Joined: Sun Dec 05, 2004 3:18 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 6:07 am

Texan

'WN has hedged 100% of their fuel for this year. They have hedged a good amount for next year. As oil prices are believed to keep rising until July, at which point they will fall back a slight amount before rising again, this is a very good strategy. But, just in case oil prices did drop dramatically, WN has an "out" clause in their hedging contract which would call for a minimal loss for WN before their fuel prices were back to a very low price.'

Every hedge has an 'out' clause. It's called sell and run - you take the loss on the chin or the profit in the back pocket. There is no other out clause.

Please show links to WN financials and / or execs statements supporting 100% hedging in 2005, hedging in 2006 & out clause in 2006.
 
PVD757
Posts: 3021
Joined: Sun Aug 24, 2003 8:23 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 6:23 am

Bad business decision: Southwest has just decided to sell only 1 seat per flight from now on. This will surely reduce revenues and negatively effect thier stock price.

Good business decision: Southwest has hedged fuel at lower than market prices in an effort to control costs during a time of record high prices of fuel.

I do understand what Padcrasher is attempting to convey here, but there is always some way to twist financial performance in the never ending "if" scenarios. Ok, so "if" you take away the hedges, WN doesn't look so awesome, so what, they did hedge. Can we run the financials on USAirways "if" thier employees didn't give up half thier pay? How about "if" UA decides tomorrow to turn thier 747s into condos in Siberia, how would that effect thier balance sheet?

I think that's what is creating the great divive on this thread...
 
MaverickM11
Posts: 15208
Joined: Thu Apr 06, 2000 1:59 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 6:31 am

"Call it what you want, but I call it sound financial planning and excellent foresight by our leadership, both corporate and financial. "

It's mostly luck. South African hedged against the dollar prior to the dollar's slide into the grave and they lost their shirt...subsequently the top management at South African was completely overhauled. As others have said, WN is taking a huge risk in hedging 100% of its fuel at $40 (or whatever the price is). If fuel goes back down towards the $30s...WN will lose millions.

But that's really beside the point. The initial point was that the operating margin, before speical items, at WN is -9% and -7.8% at CO. That speaks a lot to the relative success of CO and WN.
E pur si muove -Galileo
 
N1120A
Posts: 26467
Joined: Sun Dec 14, 2003 5:40 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 6:31 am

Quoting Tockeyhockey (Reply 15):
no, if fuel went to $30, WN would still be buying at $40 (or whatever they agreed to) and would be losers in the bet. that's all hedging is anyway -- educated betting. you're betting whether the cost of fuel will be higher or lower in a year or two years time.

The thing that hedging has done for them is plan out their profit margins. Sure, oil could have dropped to 10 dollars a barrel people would say WN got the shaft, but they would still be making money. Hedging is the right move because it allows planning for the future. FR hedges as well, and it has helped them.

Quoting Tockeyhockey (Reply 29):
73G, wingtips,

Winglets
Mangeons les French fries, mais surtout pratiquons avec fierte le French kiss
 
CalPilot17
Posts: 100
Joined: Mon Jul 10, 2000 4:09 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 7:12 am

wn hedged a $26 a barrel compared to almsot $60, a smart move.

I think this post has really turned away from it inital point. Southwest is only the golden child because of a lucky move with fuel prices. But in the long run if CO was flying all their airplanes on one engine(not litteral because i know that the airplane would just fly in circles on one engine) then they would in this case be making more money that wn, which would drive down wn stock prices the only reason that southwest is making money is because just as it has for many year is operating on a on even plaing field.
Gear Down For max career Advancment
 
jacobin777
Posts: 12262
Joined: Sat Sep 11, 2004 6:29 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 7:40 am

Quoting Mariner (Reply 36):
Presently, it (LUV) is trading below $15, while JetBlue (JBLU) is almost $20, and a lot of people believe it is JBLU that is seriously over-priced, not LUV.

actually, price of the stock is only part of the equation, it also depends on the amount of shares outstanding...

if company xyz's stock price is $10/share and has 1,000 shares oustanding, then its market cap is $10,000

if company abc's stock price is $5/share, but has 10,000 shares outstanding, then its market cap ist $50,000.

in WN's and B6's case, even though B6's stock price is higher, WN has more shares outstanding, in fact, by market cap weight, WN is 5.3 times larger than B6.

Of course, there are other metrics such as P/E, growth rates, etc....but this is an apple to apple comparison..

WN's info

http://finance.yahoo.com/q/ks?s=luv

B6's info..

http://finance.yahoo.com/q/ks?s=jblu
"Up the Irons!"
 
whitehatter
Posts: 5180
Joined: Sat Jun 12, 2004 6:52 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 7:54 am

None of you have addressed another point which may become extremely relevant, hedge defaults.

This is something which is worrying the fuel purchase divisions, as the brokers/suppliers with which the contracts are placed could theoretically default on the contracts due to the high swings in raw material prices.

It would certainly make life more 'interesting'. Especially with the huge sums involved. I've seen some talk of commodities brokers who are in serious danger of going broke as their forward bets have come off badly due to the chance of sub-$50 oil becoming a reality looking almost zero.
Lead me not into temptation, I can find my own way there...
 
texan
Posts: 4059
Joined: Tue Dec 23, 2003 2:23 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 8:26 am

Quoting PlaneSmart (Reply 39):
Please show links to WN financials and / or execs statements supporting 100% hedging in 2005, hedging in 2006 & out clause in 2006.

PlaneSmart, I do not have the statement in front of me, but Gary Kelly said in an interview with The Dallas Morning News late last year that all fuel for 2005 is hedged and a large quantity in 2006 is hedged. I will try to find it later tonight or tomorrow and post a link to the article.

Texan
"I have always imagined that Paradise will be a kind of library."
 
incitatus
Posts: 2691
Joined: Wed Feb 09, 2005 1:49 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 8:28 am

Quoting Padcrasher (Thread starter):
If fuel were to come down, Southwest's stock price would fall like a house of cards. It hasn't sunk in that this company is making it only on fuel hedging.

Pad:
You have a point but (i) you don't have to be negative about it and (ii)your "otherwise" scenario wouldn't hold.

Southwest hedged its fuel - then it can afford to keep fares very low and bleed the competition. If it didn't have fuel hedges, its fares would be much higher. Southwest didn't get lucky, they were DISCIPLINED by hedging systematically. They are taking advantage of the situation placing the competition in a rough spot and gaining market share, which is the right thing to do from a corporate standpoint.

In the comparison with Continental, you are noting that Southwest does not have a very low cost operation anymore - look at their highly paid pilots. That was the big point, I guess.
Stop pop up ads
 
Indy
Posts: 3898
Joined: Thu Jan 20, 2005 1:37 pm

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 8:37 am

This might have been covered before but I thought someone had mentioned before that the legacies were not allowed to hedge on fuel prices. Is that incorrect?
Indy = Indianapolis and not Independence Air
 
FATFlyer
Posts: 4425
Joined: Fri May 18, 2001 4:12 am

RE: The King (Southwest) Has No Clothes!

Sat Apr 09, 2005 8:59 am

Quoting PlaneSmart (Reply 39):
Please show links to WN financials and / or execs statements supporting 100% hedging in 2005, hedging in 2006 & out clause in 2006.

I don't know what Texan saw but I've seen this info recently.
Chief Executive Officer Gary Kelly told investors on a Jan. 19 conference call that the airline remains 65% hedged in 2006 at $32 per barrel; over 45% in 2007 at $31 per barrel; 30% in 2008 at $33 per barrel; and over 25% in 2009 at $35 per barrel."
http://yahoo.smartmoney.com/stockwat...rticles&advtype=StockWatch&pgnum=2

Page 1 of that article said WN was 85% hedged for 2005 at at $26 a barrel.
"Travel is fatal to prejudice, bigotry, and narrow-mindedness." - Mark Twain